Archive for June, 2010
On June 21, the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Office of Thrift Supervision (the “Agencies”) issued final Guidance on Sound Incentive Compensation Policies. The guidance is designed to help ensure that incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent with safety and soundness.
Application to Smaller Banking Organizations
Although the proposed guidance only applied to banking organizations supervised by the Federal Reserve, the final guidance applies to all banking organizations supervised by the Agencies. However, the final guidance is expected to have less impact on smaller banking organizations, which, unlike their larger counterparts, may not need to implement systematic and formalized policies, procedures and processes. Whether or not an organization is considered “large” is determined under the relevant agency’s standard. The guidance permits flexibility for customized arrangements.
The guidance applies to senior executives and other employees who, either individually or as part of a group, have the ability to expose the baking organization to material amounts of risk. “Senior executives” includes, at a minimum, “executive officers” within the meaning of Federal Reserve Regulation O (12 C.F.R. § 215.2(e)(1)) and, for publically traded companies, “named officers” within the meaning of the Securities and Exchange Commission’s rules on the disclosure of executive compensation (17 C.F.R. § 229.402(a)(3)).
The final guidance embodies the same three key principals as the proposed guidance:
- Incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk;
- These arrangements should be compatible with effective controls and risk-management;
- These arrangements should be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The final guidance will be effective on the date of its publication in the Federal Register. A complete copy of the final guidance can be found here.
At the request of members of Congress, the Federal Trade Commission (FTC) announced on May 28, 2010 that it would, for the fifth time, delay enforcement of the Identity Theft Red Flags Rule (the Rule). This time, the enforcement date has been pushed back until December 31, 2010. This delay gives Congress time to act on recently introduced legislation that would exempt healthcare, accounting and legal practices with 20 or fewer employees from compliance with the Rule.
Developed under the Fair and Accurate Credit Transaction Act of 2003, the Rule has already been enforced by banking regulators for most financial institutions since November, 2008. The FTC has interpreted enforcement of the Rule as having a surprisingly wide application for the non-financial institution businesses that it regulates. Under the FTC’s interpretation, any business that bills customers after providing goods or services is a “creditor” subject to the Rule. This includes many health care providers, construction companies and other merchants and service providers. If such “creditors” have “covered accounts” (as defined in the Rule), they must adopt an identity theft prevention program. That program must be designed to identify, detect, and respond to patterns, practices, or specific activities – known as “red flags” – that might indicate identity theft.
It is precisely the wide scope of the FTC’s interpretation of the Rule which has caused the delays. Initially, many business did not believe the Rule applied to them. After the FTC opined that many service providers, including attorneys and health care providers, would be subject to the Rule, industry trade associations have attempted to limit the application of the Rule through various forums. On October 29, 2009, the American Bar Association secured a decision in federal district court that the Rule does not apply to lawyers, which the FTC is appealing. More recently, in May 2010, the American Medical Association, along with the American Osteopathic Association and the Medical Society of the District of Columbia, filed a lawsuit against the FTC to prevent application of the Rule to physicians after unsuccessfully petitioning the FTC to reconsider its broad interpretation of the Rule. That lawsuit is still pending.
A full copy of the FTC’s May 28, 2010 press release is available here.